By Saxo Bank
The USD pushed back against the rest of the major currencies outside of the JPY (where another attempt at 100.00 was beaten back) ahead of key US Retail Sales and confidence data.
I’ve discussed the drivers for the strength in EURUSD in recent days, suggesting that the main focus point here is the ECB’s “stand pat” stance relative to the on-going, open-ended QE in the US (with reduction of Fed asset buying possibly delayed by recent weak data) and the wild expansion of the monetary base and BoJ balance sheet in Japan. Another, somewhat related route to EURUSD strength may be from reserve diversification in China, where the huge growth in March reserves of $130 billion may have been stimulated by the enormous USDJPY rally of this spring and which also must have resulted in a good deal of reserve diversification, which has favours EURUSD upside. This same phenomenon could be a driver behind the exaggerated strength in AUD and NZD of late, which has also been outrunning the usual fundamental inputs (interest rates, etc…). But much of this is rear-view mirror stuff, and I’m still looking for a pivot back lower in EURUSD as there are simply too many risks in the pipeline for the EU project as a whole and the ECB is going to respond in one way or another soon.
EURUSD
The 55-day moving average survived as resistance nicely yesterday – let’s see if we can get some follow up momentum lower in the short term that will soften the momentum of the squeeze and begin to confirm a pivot back to the lower range and an eventual break lower. Again, the unfortunate thing is that we’re up against the pesky round 1.3000 level which serves as a psychological magnet for many. By the way – I just did a study of how many days EURUSD has traded intraday at the price of 1.3000 since first reaching that level in 2004 and the result in an astounding 140 days. Compare that with other major round figures: 1.25: 68 days and 1.35: 96 days. This is the heart of the volume weighted price for the last 9 years, it seems.
Elsewhere – interesting to see climax and then rather sharp reversal in NZDUSD. AUDUSD can’t maintain the new highs above 1.0550 this morning, but only sub 1.0500 threatens real reversal potential. EURJPY has slipped below 130.00, and USDJPY couldn’t quite nip the 100 level overnight – more room for JPY bears in the shortest term as government bonds are on a tear this morning despite big sell-off in JGB’s overnight? EURGBP looks soft and short term key support for GBPUSD comes in at 1.5350/60.
Looking ahead
Today we have pivotal US data after an accumulation of rather ugly numbers recently – the US Retail Sales report for March and the preliminary University of Michigan confidence number for April. Do we see strong numbers that shake the trend of recent disappointments or weak numbers that confirm them or mixed data that confounds? The most interesting outcome relative to market positioning and market expectations would be weak data that sees the USD rally – which would suggest the short term potential of pushing the USD weakness is exhausting itself.
Boston Fed holds Dovefest 2013
Today, the Boston Fed is kicking off a two-day event (“Fulfilling the Full Employment Mandate”) that will see major Fed doves Rosengren and Evans speaking, as well as dovish former BoE MPC member Blanchflower. From this event, we can expect to see blueprints for the evolution of Fed policy from here, assuming the US recovery fails to take hold and the Fed then feels compelled to take monetary policy to the inevitable “next level”, whether NGDPLT or the like. By the way, on the subject of the Fed, please see MISH’s classic post on the Fed uncertainty principle. This is unbelievably from April of 2008, before Lehman and well before QE1. It predicts the evolution of Fed policy, which has developed as MISH anticipated. The corollary’s of MISH’s overall uncertainty principle are the most insightful, and should continue to serve as a guide for the Fed’s behaviour from here on out.
Regarding this Boston Fed conference and what it is likely to produce, MISH’s third corollary of the Fed uncertainty principle is most relevant: “Don’t expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.” In my mind, the only thing that can interrupt the cycle is a disruptive market event that falsifies the premise of Fed policy, or social tensions and the resulting political pressures from US voters, as the majority of economic participants continue to not see a recovery of any quality. The Republicans are ironically becoming the anti-Fed party (ironically because their staunchest wealthy constituents are benefitting the most from Fed policy), and in this light, this summer there is a huge risk of a disruption in the paradigm of the last five years of Fed policy.
The reason the Fed was so aggressive in easing in late 2012 was purportedly to avoid the risks from the fiscal cliff, but was it also done in the hopes that maximum benefit would be reaching the economy this summer and fall (due to the known lag in policy moves and their actual realization in the economy) as the Fed would have to undergo considerable and possibly uncomfortable scrutiny as either Bernanke faces re-nomination or a new nominee is named. Considering that it is increasingly clear to politicians that the Fed is the enabler of government spending and master puppeteer of asset markets, this event, together with the German election in September, have to be considered the premier two events of the year.
